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Financial Soundness Indicators on Households: Debt Service, Indebtedness, and Wealth Analysis

This article focuses on the measurement of total debt service, long-term versus short-term indebtedness, and households' wealth analysis. It also discusses households' maturity mismatches, solvency issues, and the impact of the last crisis on households' wealth. The data used for analysis includes the Household Finance and Consumption Survey (HFCS) and Financial Accounts.

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Financial Soundness Indicators on Households: Debt Service, Indebtedness, and Wealth Analysis

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  1. Outline • Financial Soundness Indicators (FSIs) on households • 1.1 Total debt service compared to principal payments and interests paid • Focus on technical measurement • 1.2 Total households’ indebtedness: long term versus short term indebtedness • Focus on real estate analysis • Households’ wealth analysis • 2.1 A measure of households’ maturity mistmaches & households’ solvency issue • 2.2 Households’ wealth effects and the last crisis • Focus on the Household Finance and Consumption Survey (HFCS)

  2. FSIs: Household debt service and principal payment to income The indicator on total debt service could be divided into two parts : The principal payments and the interests paid on the debt

  3. FSIs: Household debt service and principal payment to income • Principal payments calculation • Two data collecting used: • One from Balance Sheet Item (BSI) statistics used to compile monetary statistics and providing net transactions on loansgranted to households equal, inside a quarter, to: • New granted loans – principal payments on existing loans • One from Monetary Interest Rate (MIR) statistics used to compile the interest rates and new business to households • A simple way of calculation would lead to: • Principal payments = new business- net transactions • A need for retreatment as the two data collecting • are not consistent

  4. FSIs: Household debt service and principal payment to income • Principal payments calculation • Retreatment on MIR statistics to comply with the BSI statistics perimeter • Main issue: • MIR statistics on new business include new negociations of existing loans meaning for instance debt renegotiation for which households benefited from lower interest rate - especially observed in 2010 • series on renegotiations come from a loan by loan collection of data implemented in the context of the calculation of usurary rates • Conclusion: series on new loans from MIR statistics are “ bleeded ” from debt renegotiation • After corrections, the simple calculation may be applied: • Principal payments = new business- net transactions • Interests paid on loans compiled through FISIM

  5. FSIs: Household debt service and principal payment to income • Interests paid calculation • Interests paid on loans compiled (including FISIM) as: • Apparent interest rate from MIR statistics × • outstanding amounts on loans from financial accounts • total interests paid by households > interests paid in non financial accounts (D.41) • Interests paid in non financial accounts (D.41) are calculated as: • Reference rate × • outstanding amounts on loans from financial accounts

  6. FSIs: Household debt to Gross Domestic Product The indicator on total debt to GDP could be divided into two parts: The short term debt and the long term debt

  7. Households’ indebtedness and real estate transactions Households’ risk analysis cannot be disconnected from real estate analysis Graph (1) – Left: Long term banking loans to households compared to existing-home transactions and households' investment rate(data cumulated over 4 rolling quarters for loans and transactions) Graph (2) – Right:Real estate prices compared to households' disposable income Sources: Banque de France, INSEE (NSI), CGEDD after Tax Department and notaries' databases

  8. Households : maturity mismatches and solvency issue • Maturity mismatches indicator = short term liabilities / liquid assets • Solvency indicators : total debt / total financial assets & total debt / total assets (including housing and built land).

  9. Households’ revaluation The plunge in market prices would entail to a negative change in the households’ gross financial wealth (assessed at about 130 € billions)…

  10. Households Finance and Consumption Survey (HFCS) and Financial Accounts • …But not hitting most of households • Confirmed by a satisfactory consistency between HFCS and financial accounts

  11. Measurement of Households’ risks for France Thank you for your attention

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